Key News

- U.K. Gilt Auction Sees Strong Demand The U.K.'s second gilt auction of the week also met with strong demand -- evidence that U.K. government bonds are still seen as safe havens despite debt troubles in the euro zone. (Wall Street Journal)

- Asia Shares Rise Broadly Asian stock markets ended higher Thursday, with Japan's Nikkei Stock Average marking its biggest rise of the year as exporters cheered the yen's fall. (Wall Street Journal)

Quotable

Good tests kill flawed theories; we remain alive to guess again.

Karl Popper

 

FX Trading - A short opportunity in Australia dependent entirely upon others.

You might remember I kicked off the show on Tuesday by touching on the latest Reserve Bank of Australia monetary policy decision: no change to interest rates. There have been a few pieces of Australia-specific economic data to believe that higher rates are already starting to bite. But my main point was that the RBA was probably very much concerned about the potential for global growth trends to adversely impact Australia in the second half of the year.

Out today was some positive news for Australia - they turned a trade deficit in March (and an expected trade deficit in April) to a trade surplus. April's actual surplus of A$134 million was a welcomed surprise, relative to the consensus A$500 million deficit estimate.

The takeaway from this number, per a Reuters article, is that this is the beginning of a sustainable trend that's going to be a huge boon for Australia's economy. Here's what one analyst had to say:

Today's data provide a reminder of one of our long held themes which we continue to think will underpin above trend growth going forward, said Su-Lin Ong, a senior economist at RBC Capital Markets.

The recovery in the terms of trade which began in late 2009 is accelerating and will deliver a strong boost to income and demand, assisting in some rotation of growth away from public spending to firmer private sector demand.

Great! Sure can't argue that it would be quite a welcomed rotation. And sure can't argue that Australia has decent potential to see a sustained improvement in their terms of trade. But there's one thing I can argue - the timing.

The April trade number is already old news. It is June, and in May we witnessed a change in market sentiment that seems very much justified. Unless of course it's just due to the old adage: sell in May and go away. (Though that indeed may be the best decision for some investors.)

It was a 10.7% rise in exports that boosted Australia's April trade balance. Below is a series of charts showing the value of Australia's exports to select countries (chosen based on what I had easy access to!). In particular order: lowest to highest total value of Australian exports.

Chart summary:

- Korea is providing some help, as the recent bounce seems to indicate a recovery.

- New Zealand has at least come off its lows.

- The United States, albeit the smallest recipient of Australian exports in the series of charts, imported quite a bit less in April than in March.

- Japan, a big player for Australia, has shown a nice uptick in total value but a relatively small improvement relative to their potential contribution.

- And then there's China; barely a hiccup in that chart when exports to all other countries collapsed; now the figure sits just shy of its early 2009 high.

What's obvious is that Asia is the key player here, with Japan and China being the most key. Hence, that's the biggest risk to Australia right now. Can Japan and China hold strong in the face of a euro-contagion sparked double dip?

Their share of global surplus may just be in jeopardy if the euro keeps on getting cheaper. Have they got anything to compensate for such a hit to their main growth driver?

 

Exports to the EU: China in blue, Japan in black; Is the recovery bounce-back finding a lower high?

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Eurozone current account balance: due to spend some time in surplus?

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AUDUSD Daily: A chance to short the Australian dollar, now or maybe by next week? You may opt to wait and see if a higher high is reached in the wake of the US Nonfarm payrolls report tomorrow. But either way, this trade should pay off before any long-term move into long Australian dollars makes sense.

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John Ross Crooks III Black Swan Capital www.blackswantrading.com